1. Listed Corporate Bonds & Debentures
Listed Corporate Bonds & Debentures – Attractive options for Investment December 10, 2012
Top Picks from Listed Corporate Bonds & Debentures:
Last Tenor Daily
Residual Interest Latest
traded Coupon Call / Put to Call YTC Average
Issuer Series HSL Scripcode Tenor Maturity payment Record YTM (%)
Price Rate (%) Date / Put (%) Volume
(Year) frequency Date
(Rs) (Yrs) (Nos)
Tax Free Bonds
AAA Rated
REC 812REC27 REC812NBNR 1086 8.12% 15 Yrs 14.32 Annual 16-Jun-12 NA NA NA 3251 7.51%
Power Finance Co 830PFC2027 PFC830N6NR 1079 8.30% 15 Yrs 14.17 Annual 28-Sep-12 NA NA NA 4400 7.50%
AA+ Rated
HUDCO Series – 1 HUD810N3NR 1102 8.10% 10 Yrs 9.26 Annual Nil NA NA NA 768 7.45%
HUDCO Series – 2 HUD820N2NR 1111 8.20% 15 Yrs 14.26 Annual Nil NA NA NA 4427 7.61%
Taxable Bonds
AAA Rated
SBI N3 STABANN3NR 10860 9.75% 10 Yrs 8.29 Annual 16-Mar-12 17-Mar-16 3.29 8.97% 66 9.32%
SBI N5 STABANN5NR 11251 9.95% 15 Yrs 13.29 Annual 16-Mar-12 17-Mar-21 8.29 8.90% 264 9.17%
AA+ Rated
Residual Maturity- Below 24 months
Shriram Transport Finance STFC N2 SRTRANN2NR 645 11.25% 5 Yrs 1.73 Annual 15-Mar-12 NA NA NA 195 12.91%
TATA Cap Fin Serv TCFSL N3 TAT105N3NR 1066 10.50% 2 Yrs 1.25 Annual Nil Nil NA NA 373 11.54%
Residual Maturity- Above 24 months
Shriram Transport Finance STFC NR - Indivi SRTRANNRNR 1000 11.15% 3 Yrs 2.68 Annual Nil NA NA NA 248 12.84%
Shriram Transport Finance STFC NM SRTRANNMNR 1040 11.35% 5 Yrs 3.61 Annual 15-Mar-12 13-Jul-15 2.61 13.05% 57 12.71%
AA- Rated
Residual Maturity- Below 24 months
Manappuram Finance MFLNCD3 MFLNCDN3NR 1016 12.20% 2 Yrs 0.76 Semi Annual 31-Aug-12 NA NA NA 654 14.44%
Religare Finvest Limited O2C2 RFL2C2N5NR 1058 12.15% 3 Yrs 1.81 Annual 29-Mar-12 NA NA NA 417 13.68%
Residual Maturity- Above 24 months
Muthoot Finance MFINNCD2D MUTFIN2DNR 1130 NA 5.5 Yrs 4.13 Cumulative Nil NA NA NA 226 14.83%
India Infoline Fin IIFLFIN N4 INDINFN4NR 1023 11.90% 5 Yrs 3.71 Annual 23-Mar-12 NA NA NA 2045 13.94%
Prologue: Debt instruments called fixed income securities are issued by a wide range of organizations like the Central and State Governments, statutory
corporations or bodies, banks, financial institutions and corporate bodies. They are an essential component of anyone’s portfolio which offer safety of
money invested, adequate liquidity, and flexibility in structuring a portfolio, easier monitoring, long term reliability and certainty of returns from investment
made.
Indian Debt market is majorly dominated by the Government Securities which account for the highest share of total market capitalization. The G-Secs
market plays a vital role in the Indian economy as it provides the benchmark for determining the level of interest rates in the country through the yields
on the government securities which are referred to as the risk-free rate of return in any economy. Besides G-Sec market, there is an active market for
corporate debt papers in India which trade in short term instruments such as commercial papers and certificate of deposits issued by Banks and long
term instruments such as debentures, bonds, zero coupon bonds, step up bonds etc.
Segments: In addition to the equities segment (where corporate bonds and debentures are listed and traded), both the NSE and BSE have trading
segments called Wholesale Debt Market (WDM) and Retail Debt Market (RDM). The WDM segment is essentially wholesale in nature where deals are
negotiated in lot sizes of Rs 5 crore. The active participants in WDM are commercial banks, mutual funds, financial institutions, insurance companies
and others. The Gilts (G-Secs) are the main traded instruments in WDM. Retail Debt Market platform was introduced for retail investors where they can
buy and sell debt securities from different locations in the country through registered brokers and their sub brokers. However to encourage participation,
corporate bonds and debentures are normally listed and traded on the regular Capital Markets segment.
Particulars BSE NSE
Number of Companies whose bonds and NCDs are actively traded 9 11
Total number of Series of bonds/NCDs that are actively traded 48 85
Recent shift: In India, most of retail investors prefer debt mutual funds to participate in the debt market investments. However, the participation directly in
debentures in the primary as well as secondary markets has been increasing in present days given the more bond offers, ample liquidity in the
secondary markets and higher coupon rates that are provided to the retail investors, etc. Investors can actively participate and transact in the in these
bonds that are listed on the stock exchanges. These bonds are listed along with equities in the exchanges in NSE and BSE to offer the operational
flexibility of the equity segment. The prices that are shown in the exchange platforms are "dirty price" which means that the price is including the
accumulated interest from the last interest payment date to the date. The other term this is called as “clean price” that does not include the accumulated
interest. Hence the buyer of the bond does not need to pay over and above of the quoted price (excluding transaction charges). Investors those who
names are appearing in the list on record date are eligible to receive the interest payment. Normally, record dates are fixed 15 days prier to the interest
payment date for these securities.
Types of bonds: Among the debt securities listed in the market, we consider only actively traded debt instruments that are in the secondary markets
such as NSE and BSE. Further, they are classified as Taxable and tax free bonds. The interest on the taxable bonds is subject to tax at the normal rates
while the interest on the tax free bonds is exempted from income tax. It is worth noting that tax free bonds are merely tax free on the interest earned.
They are not capital gain bonds. Financial institutions such as Shriram Transport Finance Co, L&T Finance, TATA Cap Fin Serv, SBI, India Infoline
Finance, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest Limited have issued taxable Non Convertible
Debentures that are traded actively in the secondary markets. State Run Institutions such as NHAI, PFC, IRFC, HUDCO and REC have issued tax free
bonds. All the mentioned securities provide ample liquidity in the exchanges they are traded. The bonds are further classified as AAA, AA+ and AA-
bonds according to their credit ratings.
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2. Liquidity: Liquidity plays important role for trading those debt securities. Apparently speaking, debt instruments with higher credit quality are most popular
trading instruments having ample liquidity in the secondary markets. Liquidity in bond market is driven by volume of bonds offered by issuers in the
primary market on an on-going basis as well as the circulation of bonds in the secondary market with active investor participation. Larger participation of
investors reduces impact costs for both buyers and sellers and ease liquidity problems leading to a lower discount/premium of the bond.
Factors determining the values of the bonds:
i. Interest rates: The market value of the securities is inversely affected by movements in interest rates. When rates are rising, market prices of existing
debt securities will fall, as demand increases for new-issue securities with higher rates. As prices decline, yields are brought into line with the prevailing
rates. When rates are falling, market prices will rise, because the higher rates on outstanding debt securities will be more valuable. Here, too, the market
works to align the yields with prevailing rates. Downward trends in interest rates also create reinvestment risk, or the risk that income or principal
repayments will have to be invested at lower rates.
Relationship between Prices of bonds and Yields of 10 Yr G Sec Benchmark:
Muthoot Finance - N6 NHAI - N1
1100 Clo se P rice (LHS) 9.2 1120 Clo se P rice (LHS) 8.8
1 Yr G Sec B enchmark Yield (RHS)
0 1 Yr G Sec B enchmark Yield (RHS)
0
1080 8.7
9.0 1100
1060
8.6
1040
8.8 1080
8.5
1020
1000 8.6 1060 8.4
980 8.3
8.4 1040
960
8.2
940
8.2 1020
920
8.1
900 8.0 1000Feb-12 8.0
Mar-12
May-12
Jun-12
Jul-12
Oct-12
Nov-12
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Nov-12
Sep-12
Sep-11
Sep-12
Apr-12
Aug-12
ii. Credit rating: The safety of a fixed-income investor’s principal depends on the issuer’s credit quality and ability to meet its financial obligations. Issuers
with lower credit ratings usually have to offer investors higher yields to compensate for the additional credit risk. A change in either the issuer’s credit
rating or the market’s perception of the issuer’s business prospects will also affect the value of its outstanding securities.
Meaning of credit rating symbols: Rating agencies use simple alphanumeric symbols to convey credit ratings. For example, CRISIL assigns credit
ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. To illustrate, CRISIL's long-term
credit rating scale and the description associated with each category on the rating scale is given below.
Symbol (Rating category) Description (with regard to the likelihood of meeting the debt obligations on time)
AAA Highest Safety
AA High Safety
A Adequate Safety
BBB Moderate Safety
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default
Note: Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative
connotations whatsoever. However an issue with a rating carrying a negative symbol is mildly inferior in terms of credit rating compared to another issue
with similar rating without the negative sign.
iii. Inflation or Purchasing Power Risk: The other major influence on bond prices is inflation. Rising inflation is damaging to bond prices, because, unless
the bonds are index-linked, the income they generate will fail to maintain its buying power. To compensate for this dwindling buying power, prices of the
bonds typically fall. When inflation is on the increase, bond prices fall, and yields rise. When inflation is decreasing, bond prices rise, and yields fall.
Tax Implication:
Particular Tax Free Bonds Taxable Bonds
No. Interest income is not tax free. Interest earned would
Yes. Interest Income is tax free. (exempt u/s 10(15)(iv)(h)
Interest Income be treated as “Income from other sources”, and taxed as
of the Income Tax Act, 1961).
per investor's tax slab.
No. Since the interest Income on these bonds is exempt, No. As the debt security is issued in a dematerialized form
TDS
no Tax Deduction at Source is required. and is listed on recognized stock exchange in India.
Yes. Under section 2 (29A) & 2 (42A) of the Income Tax Act, the Bonds are treated as a long term capital asset if the
Long Term Capital Gains
same is held for more than 12 Months where they are subject to the tax at the rate of 20% of capital gains with indexation
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3. or 10% of capital gains without indexation.
Short-term capital gains, where bonds are held for a period of not more than 12 months would be taxed at the normal tax
Short Term Capital Gains
rates.
STT Securities Transaction Tax (STT) is not applicable on transactions in the Bonds.
As per section 56(2)(vii) of the I.T. Act, the gift shall be taxable as the income of the recipient where the aggregate fair
Gift Tax
market value of which exceeds Rs. 50,000.
Wealth Tax No wealth tax is levied.
A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge for
Cess
corporate only) is payable by all categories of tax payers.
Below are the charts that portray the price (unadjusted) movements of Taxable and Tax free bonds and the total traded quantity (in numbers) in the
exchange. The sudden drop in the price line denotes the interest payout of interest for the respective periods.
Price movement of the Muthoot Finance NCD Series N6 (taxable bond) since launched:
1100 25000
Total Traded Quantity (RHS)
1080
Close Price (LHS)
1060 20000
1040
1020 15000
1000
980 10000
960
940 5000
920
900 0
May-12
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Jun-12
Jul-12
Oct-12
Nov-12
Sep-11
Sep-12
Apr-12
Price movement of the NHAI N1 (tax free bond) Series N6 since launched: Aug-12
1120 50000
Total Traded Quantity Close Price
45000
1100
40000
35000
1080
30000
1060 25000
20000
1040
15000
10000
1020
5000
1000 0
Feb-12
Mar-12
May-12
Jun-12
Jul-12
Oct-12
Nov-12
Sep-12
Apr-12
Aug-12
Market Terminology:
YTM is yield to maturity - Annualised yield that would be realized on a bond if the bond was held until the maturity date. It basically measures the total
income earned by the investor over the entire life of the Security.
Yield to call (YTC) is the annualised rate of return that an investor would earn if he bought a callable bond at its current market price and held until the
call is first exercisable by the issuer.
Maturity: Securities are issued for a fixed period of time at the end of which the principal amount borrowed is repaid to the investors. The date on which
the term ends and proceeds are paid out is known as the Maturity date. It is specified on the face of the instrument. In respect of Demat Debt instrument
due date is known from ISIN Number of the security.
Coupon rate and Yield: The difference between coupon rate and yield arises because the market price of a security might be different from the face
value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.
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4. Record date/shut period: G-Sec/Bonds/Debentures keep changing hands in the secondary market. Issuer pays interest to the holders registered in its
register on a certain date. Such date is known as record date. Securites are not transferred in the books of issuer during the period in which such
records are updated for payment of interst etc. Such period is called as shut period. For G-Secs held in Demat form (SGL) shut period is 3 working days.
Face Value, Premium and Discount: Securities are generally issued in denominations of 10, 100 or 1000. This is known as the Face Value or Par Value
of the security. When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face value, then it is said
to be issued at a Discount.
Primary Dealers: Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising the first tier of the government securities
market. Satellite Dealers are working in tandem with the Primary Dealers forming the second tier of the market to cater to the retail requirements of the
market.
Options: There are embedded options such as Put and Call attached to NCDs.
Call Option: A callable bond could be called or redeemed by the issuer before the maturity of the bond. Issuer will call away the bond when the bond was
issued in a high interest rate environment and interest rates fall subsequently. Investor will lose the high interest or coupon payments and will be left with
redemption proceeds to be invested in a lower interest rate environment.
Put Option: A putable bond works in an exactly opposite way where the investor can sell the bond to the issuer at a specified price before the maturity of
the bond if the interest rates go up after the issuance and investor has higher yielding investment options available.
Callable bonds are preferred by the corporation while investors prefer putable bonds. All things equal, a callable bond would trade at a lower price than
the putable bond.
Secured and Non Secured NCDs: Non Convertible Debentures are generally classified as secured and unsecured based on security of invested
amount. Secured NCDs are secured by a charge on the assets of the company. The holders of secured debentures have the right to recover their
principal amount and the unpaid amount of interest on such debentures out of the assets mortgaged by the company. Unsecured NCDs do not carry any
security with regard to the principal amount or unpaid interest.
Analyst: Dhuraivel Gunasekaran.
RETAIL RESEARCH Fax: (022) 3075 3435
Corporate Office: HDFC Securities Limited, I Think Techno Campus, Building –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg
(East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com
Disclaimer: Debt investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited
and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be
taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or
complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time
to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients.
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